Jury Is Out On Free PC, ISP Promos

The prospect of taking home a free or heavily discounted PC in return for signing a long-term ISP contract may draw thousands of first-time PC buyers, but the jury is still out on what long-term effect these offers will have on the industry.

PC manufacturers overwhelmingly applauded the offers from America Online/eMachines, MSN and Prodigy that offer $400 mail-in rebates to consumers who sign a three-year contract with the ISP, effectively bringing the price of a low-end PC to zero.

The AOL deal is restricted to the purchase of an eMachine PC, in which it bought a minority stake, and requires the customer to pay $21.95 per month for three years. The MSN and Prodigy plans cost $19.95 per month and give $400 off the purchase of any PC.

What the deals are expected to do is greatly increase household PC penetration, which is now just above 50%, by bringing in hordes of first-time PC buyers. But some retailers and analysts pointed to a down side. They believe the offers devalue higher-priced, big-margin PCs and are not certain on whether consumers will sign long-term ISP contracts.

"Compaq views this very positively. This could be one of the events that takes PC penetration to a phenomenal level," said Patrick Griffen, manager of Compaq's Presario desktop line.

The offer fits particularly well with eMachines, said Stephen Dukker, eMachines CEO, because the company's primary goal was to increase home PC penetration by introducing very low-cost computers. The company's entry-level PC carries a $399 estimated street price.

"This is probably the most significant thing to happen to the PC industry ever. There is no longer any cost barrier to entry into the PC world and could be the beginning of universal adoption of the PC," Dukker said.

"This has been the main topic of conversation at Nationwide. Only time will tell the impact it will have. These deals do not apply to everyone and some people are married to their domain name and won't want to change ISPs just to get a low-cost PC," said Jeff Kirschblum, marketing VP for Nationwide Computers and Electronics.

PC Data hardware analyst Steve Baker called the offers "just another type of rebate, but now the money is coming from the ISP. The customer still has to pay the ISP so they are not getting something for nothing." He also was not certain people would be enamored with signing a three-year commitment.

Griffen does not think this will be an issue as Compaq's early indicators show consumers are willing to commit to a lengthy ISP contract.

While an AOL spokeswoman would not say how many consumers have taken advantage of the offer since it started on July 1, Dukker said retailers are reporting eMachine sales are about four times heavier than before the offer went into effect.

Whether the ISPs can sustain the deals over a long period of time and the lasting effect the offers will have on the industry are the focus of debate. "This is a big [financial] nut for the ISPs to hold. They must pay out $400 now to collect $600 or $700 in three years," said Kirschblum.

There are also diverging views on how high-end PC sales will be affected. Griffen sees the $400 discounts possibly boosting sales of more expensive PCs because people will want to take home a $1,000 PC for just $600. Dukker sees these being heavily devalued, which plays right into eMachines plan of selling cheap PCs to the masses.

One question for everyone is, with PCs effectively free, where does the industry go from here? Chris Pollitt, Toshiba's group manager for notebook computers, wondered what sales tactic would be next and said, "In eight or nine months when a significant portion of the population that is willing to sign an ISP deal is already involved, then everyone will have to come up with some other kind of promo."